Data on 45 Maryland houses prove: buy low = bigger profit

[Andrew Stephens]

Hi everybody. I've just purchased my second SFR in Maryland. I purchased my first SFR for buy and hold in 2015.

I did a lot of looking in Germantown and Northern Montgomery County MD -- there are some nice townhouses, particularly near Lake Churchill. But I've come away thinking that there aren't a lot of good cash flow deals in Germantown, or anywhere in Montgomery County these days because it is a hot real estate market.

 My first buy and hold from 2015 is in College Park, MD and I paid $265,000 including closing costs in an auction on Hubzu.com.  I've got that house renting for $2,200 and the tenant is ready to sign his second 2-year lease.  I had bid unsuccessfully in 3 other auctions that year.

During my search in 2015 I looked at 45 houses / condos and kept a detailed spreadsheet of the asking price, the estimated rent, and the estimated simplified net (rent minus PITI plus HOA or condo fee).

I recently went back and sorted that spreadsheet by asking price, and then graphed the gross and simplified net rents, and it looks like this:

So you can see that the cheapest condo I looked at in a C neighborhood in PG County was priced at about $50,000, while the most expensive SFRs or town houses in decent school districts that I looked at in Germantown MD was priced just under $350,000.  The cheap condo flowed more cash.

What is really illuminating to me from this graph (and the experience of gathering the data in my property search) is that it proves the obvious point that in order to get cash flow, you have to purchase properties below a certain price.  Or in other words, the more you pay, the less you make.  The pros on biggerpockets know this already, but it has been enlightening for me to work through these numbers.

So, for example, I've found in the Montgomery County and Prince George's County MD suburbs of Washington DC, the houses below $250,000 will cash flow about $500 per month after PITI + HOA or condo fees, and the profit margins drop off significantly above $250,000.

That's because the rents I looked at are pretty flat -- everything I looked at rents between $1,500 and $2,200

Others may have different experiences in this metro area, but this is what I found in 2015, and again in 2017.

Specifically, I found that it is hard to get much cash flow out of the properties I looked at in the $250,000 to $325,000 range in Montgomery County. 

In 2017 I did find some investment opportunties in Northern PG County (like in Lanham), but the SFRs deals I looked at would sell in 2 or 3 days time, and I've been busy enough at my day job that I couldn't move on those houses quick enough. 

So for my second SFR I just purchased a decent 3 BR house in Cambridge, MD for $89,000, and I will make more profit on that house than I would have on any house I could purchase for less than $350,000 in Montgomery County. Obviously I will get less appreciation (and appreciation from a smaller base) but the cash flow in Cambridge will allow me to put it on a 15 year loan instead of a 30 and still gross $300 after PITI.

I'm still interested in Montgomery County, but the price / rent ratios just aren't working for me there this year.

And here is a screenshot of some of the houses in 2015 to give you a sense of the price/rent ratios and how quickly that ratio changes over $250,000.

I had hoped to share this data at the Gaithersburg meetup next week, but I've just been called out of town for work so I won't make that meeting.

What I learned from these 2 years of property searching is that you have to be in or near a community that has price to rent ratios that cash flow.  A metro area like Washington DC with a strong economy has fewer and fewer good deals, and when you do find a deal, you have to be ready to put in a competitive bid quickly. 

Again, a lot of this is common sense, but I found that I needed to dig into the data for my own education.

[Russell Brazil]

One thing you didn't factor into your analysis is rent growth.  While many of the properties you looked at may not have a great ratio to begin with, the cash on initial cash return improves over time in Montgomery County, and the wealthier parts of the metro area have high rent growth. I just turned over a few months ago one of my single families in Silver Spring and was able to raise the rent by $200 a month.

It's one of the factors you see in low cap rates in certain cities like DC, Boston, Seattle etc. The rent growth is priced into the building and that's part of the reason properties will trade at lower cap rates.

Further you will also find that the rent/price ratio is also a measure of risk.  Often times the market is viewing the low ratio properties as less risky than the high ratio properties. That's why in say Rockville you may end up with a 0.5% ratio in a low risk area, and southern PG county like Oxon Hill you can achieve 2% ratios in a high risk area.